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Every time you compare taxation to revenue, an accountant kills a kitten

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Earlier this week, Margaret Hodge, the chair of the Public Accounts Committee (PAC), wrote an editorial on tax avoidance, in which she pointed out that:

In 2012 Amazon paid just £2.4m of UK corporation tax on UK sales of £4.2bn – less than the £2.5m it received in government grants.

That's just not a valid comparison. Corporation tax is paid on the profits a company makes, not on the amount of revenue it takes in. That's because otherwise, a company with a small turnover but massive profits would pay barely any tax, while a company with massive turnover but a tiny mark-up would pay a huge amount — which would drive the latter company out of business. By taxing profits, we only take money companies can afford to pay, minimising the deadweight loss of taxation.

It's actually the same when it comes to people. It might not feel it, because it's tempting to view income tax as a tax on your "revenue", but technically its a tax on your profits. You can see this most clearly in the tax treatment of self-employed people, who are allowed to deduct the costs of business from their income tax. But it's also why, if your workplace allows you to claim expenses, you don't pay tax on them. Again, they're revenue (the money ends up in your account, after all), but not profit.

The real problem on a personal level is that few workplaces do, in fact, provide everything you need to do your job directly, or let you expense them. So, for instance, if your employer pays for your commute, you are very lucky indeed; most people pay for their petrol, bikes, or season tickets out of their post-tax income. But that's a problem with employers, not the tax system (just as it is in the depressing story in today's Guardian of employers failing to account for transportation time in zero-hour contracts, leading to people driving 50 miles a day for shifts as short as 15 minutes).

The problem the PAC has is that companies don't tend to report profit on a country-by-country basis. That's because it's pretty hard to work out; if you spend $10bn on R&D in the USA, and made 20 per cent of your sales in the UK, should $2bn of the R&D cost be subtracted from UK revenue? What if the R&D was mostly spent on widget A, while the UK sales came from widget B? But what if widget B was largely based on offshoots from discoveries made while creating widget A?

It all gets complicated, fast. And in fact, it's exactly those sort of calculations which got Apple in trouble last month; the company attributed a large amount of its R&D budget to its Irish office, and got attacked for it.

Country-by-country reporting of profits could – and probably should – be mandated, which would at least let Margaret Hodge quote the right comparison to the amount of tax companies pay. But even then, the debate will just step one degree up the chain, to whether the reporting fairly distributes profits. The problem, at heart, is that tax avoidance is like pornography: we know it when we see it, but it studiously avoids any set definition.